Rise in PVC prices was unexpected

Amidst expectation of a decline, PVC prices have seen an unexpected rise of 3.3% led by recent consecutive price hikes.

Rise in PVC prices was unexpected

Amidst expectation of a decline, PVC prices have seen an unexpected rise of 3.3% led by recent consecutive price hikes. Both price hikes have likely boosted the volumes of PVC pipe players for the month of Dec’18. Thus, contrary to the street expectations of muted volumes and inventory losses in Q3FY19, PVC pipe players are likely to post double digit volume growth (led by higher inventory refilling at distributors’ end prior to each of these price hikes) while realisations and Ebitda margins are likely to remain firm. The recent hike in PVC prices (despite the recent carnage in crude prices) is largely led by PVC shortage globally.

Back-to-back hike in PVC pricesPost Q2FY19, despite steep (over 30%) fall in crude prices, PVC prices, after falling by 4% on 1st Oct, held firm until end-Nov. PVC prices fell by 2.5% on 1st December, 2018. While the trade was expecting further fall in PVC prices, they increased by 2% and 1.3% on 20th Dec and 1st Jan, respectively.

Other polymer prices have already seen sharp correction post Q2FY19 Prices of other polymers – HDPE/ LDPE/ Polypropylene/ Polyethylene — witnessed significant fall post Q2FY19 with HDPE/LDPE/PP/PE prices falling by 18/9/11.5/7.5%, respectively. This is likely to result in near term inventory loss for companies dealing in products like plastic furniture, HDPE pipes, crates and protective packaging.

Near-term impact on plastic piping companies under our coverageGiven higher exposure to PVC (42-45% of overall volumes) and other polymers (45% of overall volumes), we estimate piping volumes and margins to remain firm for Supreme Industries (SI) in Q3FY19 while inventory losses are expected in other business segments. In case of ASTRA, while piping (70% of revenues) margins are expected to remain firm in Q3, adhesive margins are likely to improve with a lag led by recent fall in chemical prices.

Maintain estimates for companies While we believe Q3FY19 numbers for PVC pipe companies under our coverage may positively surprise the street, we maintain our forward estimates for FY19/FY20e considering the extreme volatility witnessed in crude, PVC prices and currency in the recent past.